Omega Corporation has 118 million shares outstanding, now trading at $47 per share The firm has estimated the expected rate of return to shareholders at about 12 It has also issued $160 million of long term bonds at an interest rate of 10 It pays tax at a marginal rate of 40%.

a. What is Omega’s after-tax WACC?

b. How much higher would WACC be if Omega used no debt at all? (Hint: For this problem you can assume that the firm’s overall beta [βA] is not affected by its capital structure or the taxes saved because debt interest is tax-deductible.)

Answer rating: 100% (QA)

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